Recordkeeping for Reimbursements and Meals & Entertainment

During the ordinary course of business, the practice of reimbursing employees for expenses, as well as deducting expenditures related to meals and entertainment, is common. A clear understanding of the rules will improve your ability to defend your expenses should they come into question with the Internal Revenue Service (“IRS”).

What Are the Rules?

IRC §274 requires recording “at or near the time” of the expense in order to be deemed timely; IRC §274(d) disallows the deduction of expenses that are not properly documented; and IRC §274(n)(1) caps the amount of the deduction to 50 percent of expenses.

What Does the IRS Consider Adequate Records?

Records need to address the following criteria to be acceptable:

Amount and description of each expense

Time and location of the entertainment and/or meal

Business intent and the expected benefit from the business expense

Description summarizing the topics discussed

Disclosure of the business relationship to the person or people entertained

Examples of proper documentation include:

Receipts

Cancelled checks

Invoices

Who Maintains the Records?

Depending on the type of arrangement, the burden of recordkeeping will rest on the employee or the employer.

There are two types of arrangements:

Accountable Plans

Employer expected to keep records

Contain the following characteristics:

Business Connection – expenses made on behalf of employer for employer benefit

Substantiation – follows documentation requirements

Returning Excess Amounts – employees return per diem not spent on business activities

Non-accountable Plans

Any plan not meeting the criteria of an accountable plan

Employer treats advances or reimbursements as compensation on Form W-2

Employer withholds portion of the compensation for payroll purposes

Burden shifts to employee to prove the deductibility and the deduction is subject to the two percent adjusted gross income floor

Proper documentation provides the best defense to substantiating deductions to IRS. Failure to adhere can result in disallowed expense deductions as well as penalty assessments from the IRS. Please contact us for assistance in determining the deductibility of expenses or consultation to improve your recordkeeping policies.

Recognizing our Clients’ Success

The Secret to Longevity in Business

Have you ever wondered how some companies last for generations while others fade into obsolescence? In the firm’s long history of working with closely-held businesses, several shared traits among companies…

Recordkeeping for Reimbursements and Meals & Entertainment

During the ordinary course of business, the practice of reimbursing employees for expenses, as well as deducting expenditures related to meals and entertainment, is common. A clear understanding of the rules will improve your ability to defend your expenses should they come into question with the Internal Revenue Service (“IRS”).

What Are the Rules?

IRC §274 requires recording “at or near the time” of the expense in order to be deemed timely; IRC §274(d) disallows the deduction of expenses that are not properly documented; and IRC §274(n)(1) caps the amount of the deduction to 50 percent of expenses.

What Does the IRS Consider Adequate Records?

Records need to address the following criteria to be acceptable:

Amount and description of each expense

Time and location of the entertainment and/or meal

Business intent and the expected benefit from the business expense

Description summarizing the topics discussed

Disclosure of the business relationship to the person or people entertained

Examples of proper documentation include:

Receipts

Cancelled checks

Invoices

Who Maintains the Records?

Depending on the type of arrangement, the burden of recordkeeping will rest on the employee or the employer.

There are two types of arrangements:

Accountable Plans

Employer expected to keep records

Contain the following characteristics:

Business Connection – expenses made on behalf of employer for employer benefit

Substantiation – follows documentation requirements

Returning Excess Amounts – employees return per diem not spent on business activities

Non-accountable Plans

Any plan not meeting the criteria of an accountable plan

Employer treats advances or reimbursements as compensation on Form W-2

Employer withholds portion of the compensation for payroll purposes

Burden shifts to employee to prove the deductibility and the deduction is subject to the two percent adjusted gross income floor

Proper documentation provides the best defense to substantiating deductions to IRS. Failure to adhere can result in disallowed expense deductions as well as penalty assessments from the IRS. Please contact us for assistance in determining the deductibility of expenses or consultation to improve your recordkeeping policies.

Recognizing our Clients’ Success

The Secret to Longevity in Business

Have you ever wondered how some companies last for generations while others fade into obsolescence? In the firm’s long history of working with closely-held businesses, several shared traits among companies…

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